Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/266030 
Year of Publication: 
2022
Series/Report no.: 
MAGKS Joint Discussion Paper Series in Economics No. 32-2022
Publisher: 
Philipps-University Marburg, School of Business and Economics, Marburg
Abstract: 
In the euro area, monetary policy is conducted by a single central bank for 19 member countries. However, countries are heterogeneous in their economic development, including their inflation rates. This paper combines a New Keynesian model and a neural network to assess whether the European Central Bank (ECB) conducted monetary policy between 2002 and 2022 according to the weighted average of the inflation rates within the European Monetary Union (EMU) or reacted more strongly to the inflation rate developments of certain EMU countries. The New Keynesian model first generates data which is used to train and evaluate several machine learning algorithms. We find that a neural network performs best out-of-sample. Thus, we use this algorithm to classify historical EMU data. Our findings suggest disproportional emphasis on the inflation rates experienced by southern EMU members for the vast majority of the time frame considered (80%). We argue that this result stems from a tendency of the ECB to react more strongly to countries whose inflation rates exhibit greater deviations from their long-term trend.
Subjects: 
New Keynesian Models
Monetary Policy
European Monetary Union
Neural Networks
Transfer Learning
JEL: 
C45
C53
E58
Document Type: 
Working Paper

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